Tommy Thompson, IT Security and Compliance Coordinator at Williams Company recently presented at OPUS 2010 on reducing the complexity of IT risk and compliance and how Williams was able to significantly reduce costs while at the same time increase the effectiveness of their IT compliance programs. In the following video, I had the chance to speak with Tommy after his presentation.

John Whittaker’s session on operational risk and aligning with the business covered some interesting approaches:

Barclays defines 13 principal risks that the business owns. The oprisk function can provide guidance on the control framework to mitigate each risk, but the oprisk function does not control the risk. The real process of operational risk does not sit in the corporate function.

Operational risk should be involved in discussions of strategy: it helps think through how the business can maintain their performance objectives during a 1 in 7 or 1 in 20 downturn; participates in new product approval; reviews the impact of large events. Whittaker also noted that oprisk should be involved in the stress testing process.

Operational risk managers need to understand the business intimately. This allows the function to influence decision-making effectively.

With regard to reporting, try taking away a report to see how much value it actually has. There’s some reporting that isn’t delivering the value that the reporters think. Also, trend analysis and comparison is important, not just absolute numbers. The main point is to create a discussion, which brings operational risk into the business.

Hosted by Barclays, this year’s OPEN (OpenPages European Network) Summit promises to be the best yet with a jammed-packed agenda including real-world case studies from OpenPages customer executives at Allianz, Barclays, Lloyds, ORX and Swiss Re. Joining them will be executives and product experts from OpenPages who will share the latest OpenPages product developments and review OpenPages investments and rapid customer adoption in EMEA.

If you’re unable to make it, check back for a recap of the event in the following week. Otherwise, we look forward to seeing you at Canary Wharf in London!

This weekend the president-elect Barak Obama was interviewed by Tom Brokow on Meet the Press. The interview covered a wide variety of topics, but one caught my eye as it impacts the risk management business moving forward.

On the subject of regulation in the financial services industry, Obama was very clear:

“And so, as part of our economic recovery package, what you will see coming out of my administration right at the center is a strong set of new financial regulations in which banks, ratings agencies, mortgage brokers, a whole bunch of folks start having to be much more accountable and behave much more responsibly because we can’t put ourselves–we, we can’t create the kind of systemic risks that we’re creating right now, particularly because everything is so interdependent. We’ve got to have transparency, openness, fair dealing in our financial markets. And that’s an area where I think, over the last eight years, we’ve fallen short.”

So, what does this mean for the risk management business? Well, there are two key points about what Obama said. First, he mentions accountability. The question is accountable for what. My guess is that the accountability he’s talking about is that, for instance, rating agencies have to be accountable for the ratings they issue, banks will have to be accountable for describing accurately, and completely, the securities they are selling, etc. Second, he mentions transparency and openness. Clearly, banks are going to have to provide more transparency around reporting on risk in their business. And with with more stringent reporting requirements will come greater emphasis on internal reporting on internal controls and risk exposure. Steve Adler of IBM blogged about this 10 months ago. It won’t be another 10 months for stricter regulation to materialize; the question is how will the industry respond?

We’re now in “Moving Operational Risk Forward” or “Getting Value from ORX Data and Tying Operational Risk into Each Business Unit” with Joe Sabatini, JP Morgan, and Simon Wills, ORX. The introduction is being given by David Millar, PRMIA, who opened the session with a statement on the fire evacuation procedures. Some will remember that a fire alarm during an operational risk conference is not unheard of.

Sabatini started out by echoing comments from a previous session: namely, that the increased regulatory pressure will increase the challenges of managing operational risk at regulated entities.

Loss data, according to Sabatini, has been one of main drivers for change within the operational risk field. Before loss data was collected, no one really knew how much money was being lost on operational risk. With the collection of loss data, business lines understood how critical operational risk was.

With regard to capital calculation, the Enron/Worldcom data points included in the traditional LDA approach for capital would suggest for JP Morgan that they need $50 billion in capital driven somewhat by investment banking underwriting risk. Sabatini discussed an approach similar to that in the credit world where you calculate the probability of default, loss and investors winning a suit. This approach produces a more realistic capital number.

Sabatini also discussed some of the challenges and opportunities with regard to risk management, including business unit benchmarking, trend analysis, correlation with business metrics, and dynamic reporting. He also suggested that a significant advance would to have a real time dashboard that would allow what-if analysis discussion between market, credit and operational risk functions.

Simon Wills then gave an overview of ORX, our customer and partner. He said that they will be up to 54 member institutions when they announce their newest member tomorrow. Wills noted that ORX follows the Basel II categorization, with an additional category for corporate losses (ransom paid for a kidnapping of the chairman, for instance).

ORX also collects data on the product (e.g. equity derivative) and process (sales and marketing) associated with the losses, which provides a greater degree of granularity to the loss. ORX also collects additional information on large losses (over €10 million).

Wills shared some recent data on operational risk losses, and noted that sales and trading have been the driver of the large number of losses in 2008, whose aggregate severity rivals that of the Enron/Worldcom losses of 2002.

ORX is interested in a better visualization of the data to improve the communication and engagement of operational risk with the business. Corporate finance, for instance, tends to have low frequency and high severity losses, the opposite of losses in the retail business. Wills showed a 3D graph of the two different loss data sets, with dramatic spikes in the corporate finance business.

Wills talked about ORX sector services that will provide insight for different business units to benchmark against their peers, and, in this way, provide real business performance value to operational risk managers and their business line colleagues.

Patrick de Fontnouvelle of the Federal Reserve Bank of Boston presented a an interesting session at GCOR 2010 titled, “The Role of Operational Risk in the Recent Financial Crisis.” His basic premise was that the financial crisis of 2008 could have been avoided had financial institutions implemented and followed basic operational risk management best practices. And more importantly, that there is a history of operational risk management best practices being violated repeatedly throughout history with predictable consequences. He recommended three steps to moving forward and preventing similar crises in the future:

We must work to develop and normalize operational risk management and measurement

Outreach is critical: there is a lack of understanding or a misunderstanding regarding the nature and impact of operational risk

Governance: the risk function must have sufficient stature and authority to take action against questionable practices (in other words they must have a seat at the table)

Tags

A tag is a keyword you assign to make a blog or blog content easier to find. Click a tag to find content that has been assigned that keyword. Click another tag to refine the search further. Click Find a tag to search for a tag that is not displayed in the collection.